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Unformatted text preview: Homework 3: Answer Key ECON 4721: Money and Banking, Fall 2009 Problems 1-5: Choose the best answer. Explanation is not required. The condition that states that the domestic interest rate equals the foreign interest rate minus the expected appreciation of the domestic currency is called A) the purchasing power parity condition. B) the interest parity condition. C) money neutrality. D) the theory of foreign capital mobility. 2. With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent over the coming year, the expected return on dollar deposits in terms of the foreign currency is A) 3 percent. B) 10 percent. C) 13.5 percent. D) 17 percent. 3. With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent over the coming year, the expected return on dollar deposits in terms of the dollar is A) 3 percent. B) 10 percent. C) 13.5 percent. D) 17 percent. 4. An increase in the domestic interest rate causes the demand for domestic assets to and the domestic currency to , everything else held constant. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate 5. A decrease in the expected future domestic exchange rate causes the demand for domestic assets to and the domestic currency to , everything else held constant. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate 1 Problem 6:People-to-People Lending Discuss the advantages and disadvantages of www.prosper.com versus traditional financial interme- diaries. If you had $500,000 in savings, would you invest any of that amount on www.prosper.com? If yes, what is your investment plan? If no, why not? The discussion may include, among others, the tradeoff between risks and returns for investors. For example, through www.prosper.com, investors can get higher rates of return; however, they have to take on more risks. On the other hand, through www.prosper.com, borrowers might be able to borrow at a lower interest rate and those who may not be able to borrow from banks can also get loans....
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